Investors have sharply revised up their expectations for the neutral level of U.K. interest rates since the beginning of last year, to a much larger extent than for other advanced economies. The 10-year instantaneous nominal government bond forward rate—which essentially reflects investors’ expectations for the level of overnight interest rates in 10 years’ time—has leapt to 4.53%, from 1.43% at the start of 2022. The expectation for U.K. rates at this horizon now is a few basis points higher than for U.S. rates, and 150bp higher than for Eurozone rates. But we doubt that the long-term neutral level of Bank Rate, necessary to balance demand for capital with the stock of wealth available to finance it, has shifted up since the 2010s as much as markets think. The U.K.’s poor productivity prospects will keep demand for capital subdued, while long-term global trends, such as population ageing, will continue to increase the quantity of savings looking for a return. Accordingly, we think the long-term neutral nominal
rate for the U.K. probably is around 2.5%.
Samuel, Chief U.K. Economist
